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Government Contractors

Changes to ALL Compensation for Government Contractors

As part of the 2013 Bipartisan Budget Act, Congress reduced the contractor and subcontractor compensation cap from $952,308 to $487,000, a 49 percent reduction. The cap will be adjusted annually to reflect the change in the Employment Cost Index for all workers as calculated by the Bureau of Labor Statistics. As always, contractors can pay whatever amounts they deem appropriate, but the government will only reimburse (at the most) to the cap.

Previously, Congress, in the 2012 National Defense Authorization Act, applied the ceiling on reimbursable pay to all Department of Defense (“DoD”), Coast Guard, and National Aeronautics and Space Administration (“NASA”) contract employees, rather than just the five highest paid executives. During 2012, the cap was $763,029. In 2013, the maximum changed to $952,308. This rule applies to DoD, NASA and Coast Guard contract employees on contracts awarded on or after December 31, 2011, and before June 24, 2014.

The interim rule was effective June 24, 2014, and applies to all contractor and subcontractor employees on contracts awarded on or after June 24, 2014. Federal Acquisition Regulation (“FAR”) 52.205-6(p) has been amended to reflect the change. The Secretary of Defense, Administrator of the General Services Administration, and the Administrator of NASA determined that urgent and compelling reasons exist to promulgate the interim rule without prior opportunity for public comment. This action was necessary because Section 702 of P.L. 113-67, signed into law December 26, 2013, required that it apply only with respect to the costs of compensation incurred under contracts entered into on or after the date that was 180 days after the date of the enactment of the Act (i.e., June 24, 2014). However, DoD, GSA and NASA will consider public comments received in response to the interim rule in the formulation of the final rule. Atypically, the rule is to be implemented retroactively. The retroactive application of compensation caps to contracts awarded prior to the date the FAR cost principles were amended to include such caps has been litigated in the United States Court of Federal Claims and the Armed Services Board of Contract Appeals (“ASBCA”), both of which held that retroactive application of the caps breached those contracts (see General Dynamics Corp. v. U.S., 47 Fed. Cl. 514 (2000), and ATK Launch Systems, Inc. ASBCA 55395, 2009-1 BCA § 34118 (2009)). Thus, it is almost certain that the retroactive application of the new cap will be litigated.

While the government feels compelled to limit contractors’ compensation which will likely realize at least some savings (for which a reliable estimate is not available) from both the cap and the expansion of the cap to all employees, the current Veterans Administration (“VA”) debacle has engendered new information about just how well the government safeguards Federal employees’ compensation. The Phoenix VA Health Care System paid $10 million in performance bonuses to employees over the past three years, the same period when veterans died awaiting care. An estimated 4,188 bonuses were paid over the past three fiscal years to more than 2,150 employees, including doctors, nurses and administrators. Nearly 650 VA employees received a bonus every year. Total bonuses increased substantially over the three years. The Phoenix VA has 1,700 veterans on a waiting list, who average 115 days waiting for care. The entire VA paid $395 million in 2012 in compensation and awarded nearly $30 million in bonuses. These bonuses average approximately eight percent of total compensation. Based on our experience, bonuses of this percentage are both very high and very rare in government service, but not apparently at the VA. In its own internal audit in 2010, the VA found that little or no documentation existed to support the bonuses, and nearly $1 million in unauthorized bonuses was paid. Considering the stringent application of FAR 31.205-6(f) to which contractors are subjected by government auditors, this is unacceptable.

With all of this happening as a back drop to the future, despite the narrowed statutory margin for allowable compensation the Defense Contract Audit Agency (“DCAA”) will undoubtedly double down in its efforts to recommend disallowance of compensation costs, even given the greatly reduced compensation cap. The impetus for this effort will almost certainly stem from the now infamous DCAA Compensation Team’s desire for self-preservation as much as from its nominal mission of protecting the taxpayer through “fair and reasonable” pricing. This, despite the fact that recent ASBCA compensation appeals cases upheld the appellant contractors, Metron, Inc., ASBCA Nos. 55624, 56751, 56752 (June 4, 2012), and J. F. Taylor, Inc., ASBCA Nos. 56105, 56322 (January 18, 2012). In both cases, DCAA’s executive compensation methodology was discredited by the Board.

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